Tension between wireless communications carriers and tower-owning companies that rent equipment space to them has led carriers to renegotiate rates in some cases and to the construction of alternative tower sites in others. Clayton Funk, a managing director with MVP Capital, said the tension exists because the carriers do everything they can to squeeze efficiencies from their operations. Funk spoke at a conference session about privately owned tower companies at the Connectivity Expo convention conducted by the Wireless Infrastructure Association in Charlotte, North Carolina.
“The carriers have been able to squeeze a lot of efficiencies out due to technology changes, but the cost of renting space on towers has not decreased over time,” Funk said. “In fact, it has increased over time, because the carriers continue to modify their equipment on the towers and trigger amendment revenue.” Changes to rental contracts are called amendments, and the tower owners may use amendments to charge the carriers more money.
Funk, who said he has been representing tower owners for sales since 1997, said MVP Capital is a boutique investment banking firm that specializes in renewables, technology, media and telecom, and that also raises capital for tower companies, fiber providers, DAS and small cells.
Carriers vs. Tower Companies
“The carriers have been using aggressive tactics to negotiate for better positions,” Funk said. “That includes so-called build-to-relocate towers. They’re hiring companies to build tower sites for them to relocate to and effectively attack the business of some of their current partners, the existing tower companies.”
Those steps will continue, Funk said, unless the carriers say, “The towers are vital to our network deployments. It is what it is. We’ll just focus on the best network possible.” He said one of the things that makes owning a tower and renting space so advantageous is that, especially where property zoning is difficult, the carriers have few other choices.
Sprint and T-Mobile Merger
Participants in the session spent time discussing the potential effect of a merger of Sprint and T-Mobile US, which the companies’ boards of directors have approved, and which is awaiting government approval or disapproval. Funk said that the parties with whom he does business have a history of low expectations for rental and amendment activity from Sprint. As a result, the prospect of a combined, merged company decommissioning Sprint sites and halting further Sprint network construction in favor of shifting wireless communications traffic to the T-Mobile network causes them little concern and would have little effect on tower valuations.
“When MVP Capital represented a tower owner selling assets or when we were raising capital for a company providing shared wireless telecom infrastructure, Sprint was never really forecast as a tenant on these towers,” he said. “So there will be a potential hit if you own towers and you have T-Mobile and Sprint on the same tower. What if the Sprint network gets decommissioned in several thousand sites? But we don’t believe the tower valuations change when people are trying to buy assets. We haven’t seen any buyers telling us over the last several years that they believe Sprint will be a tenant on those towers, if they are not already.”
Towers are selling at record-high prices, Funk said. “And I know this sounds self-serving, with me representing sellers, but it is as great a time to sell as any,” he said. “We are not saying to anyone to rush to the exits now because of the uncertainty involving the merger of Sprint and T-Mobile. That is not necessarily a catalyst for selling now. It is another discussion when we say to rush to the exits before prices go down because of interest rate risk and other factors, but not necessarily because of the merger.”
Sprint and T-Mobile have significant differences, Funk said, and the differences may limit the extent to which T-Mobile could simply shift Sprint customers from the Sprint network over to the T-Mobile network, allowing some decommissioning of the Sprint network. “There’s a lot of data traffic to move over, if you’re moving from Sprint all the way over to the T-Mobile network,” he said.
5G Wireless Communications
Speaking about the coming of 5G wireless communications, Funk said he kind of jokes that when wireless carriers talk about deploying 5G in 2019, it might actually be 4.5G. He said before there was 4G, it was 3.5G.
“There’s a lot of speculation of what 5G can mean,” Funk said. “It’s obviously very low latency. It’s a significant number of cell sites — whether that’s small cells or more macro sites. There has to be a business case around it, though. In theory, potential innovations will make 5G more cost-effective. It won’t be cheap or easy to deploy. No generational network upgrade generation has been cheap and easy to deploy. Meanwhile, the carriers are figuring out ways to make more money. The subscriber model is pretty broken. Apparently, American consumers are frustrated with wireless plans that leave them paying more on a per-day basis than it would cost to walk into Starbucks and get a latte.”
Funk said that if the carriers can figure out a way to make a profit with 5G, whether with serving autonomous vehicles, telemedicine applications or any other way, the 5G rollout will be faster and bigger. In the meantime, he said, it is more likely to take years for the 5G rollout to happen, and then it will probably be steady for whatever 5G becomes.
Private tower companies sometimes may construct small cells to help their customers. He gave as an example a tower developer consulting with a local market where a carrier’s engineer might ask for help with a difficult coverage problem. “In some cases, carriers are asking the smaller tower developer to solve it with a small cell, but it is very opportunistic,” he said. “We have yet to see any privately held tower companies try to move on that in any significant way within their core.”
Perhaps as exceptions, Funk mentioned the Digital Bridge investment with ExteNet Systems, a small cell developer, and the small cell activities of InSite Wireless Group. He said, however, that many of MVP Capital’s tower company clients have been in the tower business for a long time. “They understand the model,” he said. “They get it, and they don’t necessarily need or want to get in on the small cell business, unless they’re doing it to help out their customer.”
Sometimes, Funk said, he has seen tower owners looking at actually owning the cloud-based radio access network (C-RAN) and having it be a neutral host. “We’ve seen that pop up a couple of different times,” he said. “They’re getting approached and if they have the opportunity to develop it themselves and then lease it back to the carriers, they’re trying to do that. It’s pretty rare, but they’re trying.”
Increasingly, entities are having difficulty closing purchases of towers because of insufficient documentation, according to Funk. Sometimes buyers are willing to figure out ways to solve such problems and close the transactions, and sometimes they are expecting more of the sellers, he said.
“The tower industry has become sophisticated with securitizations, and buyers are looking for reasons to buy towers,” he said. “The only reason they’re putting off closings is that they really just can’t solve for an issue, like a tower built on a Superfund site contaminated by hazardous waste or something like that.” Funk said more and more counterparties are figuring out ways to solve due diligence problems and close transactions rather than delay closings.
“The market is so efficient and so hot that if somebody’s buying assets and they know they’re paying the most, they sit there as a buyer and say, ‘I want it perfect. I’m paying you a lot of money. I want this thing locked down and without any issues whatsoever.’ So maybe there’s a little bit of that, too, coming out, because it is a hot market. I can see the buyer’s position. They’re paying premiums for assets, so they want it the way they want it. They’re not going to accept dirty assets, if you will.”
The next Connectivity Expo is set for May 20–23, 2019, in Orlando, Florida.